Warren Buffett’s Single Bid Rule
posted by Lawrence Cunningham
Among the many ways that Warren Buffett is unusual is his approach to the role of price in business acquisition negotiations. Other people commonly haggle over price. Tactics include sellers naming an asking price that is higher than warranted or buyers making a low-ball bid. Some people enjoy the give and take and many believe it is a way to produce value in exchange.
Buffett eschews such exercises as a waste of time. One of Berkshire’s acquisition criteria (in addition to size, proven earnings power, quality management in place and relative simplicity of the business) is having a price. Eschewing the games so many negotiators like to play over ranges of values, Buffett wants a single price at which each side can say yes—or walk away. His bid is his bid; when he gives you a bid, what you have is what most people classify as the “best price,” “final offer,” or “highest bid.”
Buffett has repeatedly statesd this policy, along with the other acquisition criteria, in every Berkshire Hathaway annual report since 1983 (and once in a 1986 ad in the Wall Street Journal). Yet I know many people who are skeptical about whether Buffett and Berkshire actually adhere to this policy—doesn’t he engage in price negotiations in at least some cases, they ask? Aren’t there situations in which the value of an exchange is not discovered other than through the dynamic of negotiations, including about appropriate methodology?
To answer such questions, I examined the 16 Berkshire Hathaway acquisitions over the past two decades that involved public company targets. Unlike private company targets, those companies are required by U.S. federal law to publicly disclose the background of the transaction, including negotiation over all material terms, such as price.
Despite great variety among the 16 companies involved (listed below), and the banking and law firms that participated in the deals, and thus shaped both negotiations and disclosure, the background of the 16 acquisitions was remarkably similar, including on the question of price. Aside from price, the following themes recurred in every deal:
- all the deals originated in a similar, and unusual manner: they came to Berkshire as the result of business or personal relationships among principals, rather than through brokers such as investment bankers
- the information Berkshire requires before proceeding consists entirely of public financial information about the acquisition target, Berkshire imposing no conditions to conduct more elaborate due diligence involving scouring non-public information
- in most cases, Buffett requests and gets a break-up fee and the rare efforts to negotiate the amount of a break-up fee are usually successfully resisted; he explains that there can be no auction or shopping of the bid and rarely proceeds otherwise
Finally, on price, Buffett is entirely faithful to the practice he has emphasized in Berkshire’s annual report for two decades: Buffett names a price at which Berkshire will buy and sticks with it. In several cases, the seller came back to Buffett and asked for a higher price. In all such cases, he said no.
There were only two exceptions to this dynamic, where a seller replied to a bid with a higher counter-offer and extracted a higher bid. But in each of these two deals, Buffett and Berkshire had investment partners in the transaction and it was they, the disclosure suggests, who were willing to play the dickering game.
Those two deals? The more recent of the two involved Heinz, the just-concluded acquisition in which Berkshire is a 50% partner with 3G. The buyers bid $70 per share; Heinz countered at $72.50 and the buyers agreed. Had Buffett/Berkshire been negotiating that deal alone, the public record suggests that Buffett would not have budged.
The other deal where price was negotiated involved MidAmerican Energy, today one of Berkshire’s top non-insurance companies, acquired 15 years ago. In that deal, Berkshire was joined by co-investors Walter Scott and David Sokol. The bid was $34.60; the sellers got the buyers to move first to $35 and finally to $35.05. Again, had Buffett alone been negotiating, you can bet against the fractional bidding.
Notably too in both the Heinz and Mid-American deals there was considerable negotiation, and give-and-take, over the break-up fee that would be payable if the deal was agreed but did not close. Such haggling over the break-up fee is also usually off limits in a Berkshire acquisition. In fact, in several transactions, as the seller persisted in seeking a lower break-up fee, Berkshire drew a line in the sand, saying the break-up fee it proposed was the break-up fee or the deal was off.
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Acquisition Target (and my note on price negotiation):
- Benjamin Moore (BRK offered price; no counter)
- BNSF (BRK offered price; seller asked for more; BRK said no)
- Clayton Homes (BRK offered price; board had CEO ask for more; BRK said no)
- CTB (BRK offered price, actually went down a quarter for adviser fees; BRK said that’s it)
- Dairy Queen (BRK offered price; no further discussion)
- Fruit of the Loom (BRK offered single bid in bankruptcy at end of auction process and won)
- Garan (seller sought price above 60; BRK offered $60 and that was that)
- Gen Re (Buffett proposed the exchange ratio and Gen Re went along)
- Heinz (BRK and 3G proposed $70; in response to pressure, upped to $72.50)
- Johns Manville (BRK offered price; board tried to get more; BRK said no)
- Justin Brands (BRK offered price, was another bidder in picture who left; no further discussion)
- Lubrizol (BRK offered price; seller tried to get more; BRK said no)
- MidAmerican (BRK, Sokol and Scott offered $34.60; seller sought / get first $35.00, then 35.05)
- Russell (seller sought 20; BRK bid 18 and that was it)
- Shaw (BRK offered price; board/banker asked for more; BRK said that’s our best price)
- XTRA (BRK offered 59; seller asked is that your best offer; BRK said it was)